LONDON (AP) — Fears that China will tighten its monetary policy hit stocks hard Thursday despite another batch of encouraging U.S. economic news.
Sentiment has been low all day amid concerns that China, the world's second-largest economy and the main engine of growth in the global economy over the last few years, will have to cool its growth to get inflation levels down.
Figures earlier Thursday showed that China's economy grew by 9.8% in the fourth quarter of 2010, up from 9.6% in the previous three-month period. Despite a drop in inflation to 4.6% in December from the 28-month high of 5.1% the month before, price rises remain stubbornly high and could pose a danger to the Chinese economy if left unchecked.
"Higher-than-expected growth simply worried investors in to a belief that there is now a greater risk of tighter monetary policy," said Andrew Wilkinson, senior market analyst at Interactive Brokers.
China has already moved towards tighter monetary policy, raising interest rates twice in the last four months. Last week, the central bank raised the amount of money banks must keep on reserve for the seventh time in a year.
Still, many analysts think Chinese authorities need to do more.
"Policymakers are behind the curve and need to act decisively if they are to curb inflation," said Diana Choyleva, an analyst at Lombard Street Research. "The longer growth stays above trend, the worse the necessary downswing is set to be. China's violent cycle could be highly destabilizing for the world."
Unsurprisingly, Chinese shares took the brunt of the selling in Asia. The benchmark Shanghai Composite Index dived 2.9% to 2,677.65. The Shenzhen Composite Index for China's smaller, second market slid 3.4% to 1,170.47.
Japan's Nikkei 225 stock average closed down 1.1% while Hong Kong's Hang Seng index shed 1.7% and South Korea's Kospi lost 0.4% a day after finishing at a new record high.
The selling pressure persisted into the European and U.S. sessions.
In Europe, the FTSE 100 index of leading British share closed down 108.79 points, or 1.8%, at 5,867.91 while Germany's DAX fell 58.49 points, or 0.8%, to 7,024.27. The CAC-40 in France ended down 0nly 0.3% at 3,964.84.
